Last Tuesday, June 20th the Pennsylvania House of Representatives passed a bill to raise the Commonwealth’s minimum wage to $15 per hour by 2026. Although the bill is unlikely to pass the Senate, it seems only a matter of time before the minimum wage is raised from its current $7.25, where it has been since 2006.
Those supporting this bill need to read Henry Hazlitt’s Economics in One Lesson. Written in 1946, it has become a classic of free market advocacy. Hazlitt brings to modern audiences the timeless lesson most famously penned in 1850 by Claude Frederic Bastiat in That Which is Seen, and That Which is Not Seen.
The one lesson has two parts. One, any economic action must be viewed for its effect not only on the immediate party but by its effect on all parties in society. In other words, using our minimum wage proposal as an example, one must view its effect not only on those whose wages will rise, if they still have a job, but by its effect on all society, including those who lose their jobs as a result of the new minimum wage law. Furthermore, one must view the effect of the law not only in the short run but also in the long run. Economic interventions take awhile to work their way through the economy, maybe years. This is not difficult to understand, and it is amazing that legislation to raise the minimum wage completely ignores the probable consequences.
In the short run it is probable that some workers’ wages will be raised to the new minimum. It is also probable, let us even say that it is a certainty, that some workers will lose their jobs. No one is claiming that raising the minimum wage will increase jobs. So, Pennsylvania will suffer higher unemployment among low paid workers. Higher unemployment leads to increases in unemployment compensation claims. But unemployment compensation payments run out over time. Then these low income workers will be forced onto public assistance. They will remain there until their marginal productivity is at least equal to the new minimum wage, which is much higher than the stated wage due to taxes of various kinds. Of course idle hands are the devil’s workshop. It is not reasonable to assume that young, unemployed, vigorous men will do nothing. Despair will drive some to work in the unregulated, shadow economy, which would include criminal activities such as drug dealing and theft.
Ah, but we are looking only at the impact of this pernicious legislation on the worker. How about the rest of society? Let’s start with the employer of minimum wage workers. To the extent that they cannot continue to employ low productivity workers at the higher minimum wage, they will be faced with existential decisions. Some will go out of business. Others will continue in business at some reduced level. Others may need to invest expensive capital in automation. (Recently my restaurant dinner was delivered to my table by a robot!) There’s always some risk in these investments, not the least of which is that automation may turn out to be more expensive than originally assumed. If the business owner cannot pass along the full cost of higher expense to the customer, he may decide to close. What about the rest of society? The customer’s disposable income is no longer sufficient to meet the demands of higher cost goods and services. He must cut back somewhere. Even if he reduces his savings in order to maintain his previous standard of living, less capital will be accumulated for maintaining his lifestyle in the future. Add up all these reductions in savings and business in general will suffer from a diminution of capital.
There Is No Upside to a Higher Minimum Wage
There’s no such thing as a free lunch or a cost free mandated increase in some necessary business expense. There is no upside to an increase in the minimum wage. If there were some benefit, why stop at $15 per hour? Why not $20? Why not $100? If $20 sounds OK but not $100, what is the correct number? And, please, do not bring up the argument that the lower paid workers NEED the money. For one thing we’ve already established that many will become unemployed. Furthermore, the fact that many workers chose to work at the current minimum wage establishes the fact that they made a free choice and that they either chose not to work at a different job paying a higher wage or were unable to qualify for a higher paying job at this time. Chopping off the bottom rung of the employment ladder on which they stand is tantamount to a crime perpetrated by the state. It deprives potential workers of learning on-the-job and proving themselves more productive and worthy of higher pay. Most of us started working life this way. I certainly did.